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The hidden costs of debt forgiveness

On behalf of Schlueter Ecklund & Davitt posted in personal bankruptcy on Tuesday, August 28, 2018.

Illinois residents who are struggling to pay their bills sometimes seek relief by pursuing debt forgiveness, but they often find the terms offered by credit card companies or debt collectors very difficult to meet. Lenders and collection agencies are primarily interested in recovering as much of the outstanding balance as possible, and any concessions they make are designed to provide either temporary relief only or secure the largest lump sum payment possible.

Credit card companies generally sell debts to collection agencies for a fraction of their original amounts when payments have not been received for several months. These collection agencies may then offer to forgive part of the debt in return for a lump sum payment. However, this forgiven debt will still appear on credit reports as a negative item and, in many cases, the IRS will treat the forgiven amount as income and expect taxes to be paid on it. This option also assumes that individuals who have been unable to pay their bills for prolonged periods are able to gather together the money needed to settle their debt.

When only a few payments have been missed and the debt has not yet been sold, credit card companies may offer to lower payments for a year or so to allow debtors to address their underlying financial issues. This is usually done by waiving or reducing interest charges. However, that does not mean that the interest is forgotten. The uncharged interest will often still be calculated and added back once the forgiveness period is over, which means that borrowers will be required to pay interest on interest.

The alternatives to personal bankruptcy rarely tackle the causes of financial vulnerability and often help lenders more than they do borrowers. Attorneys could explain how filing a Chapter 7 or Chapter 13 petition offers those with unmanageable financial situations an escape from the debt trap and the opportunity for a fresh start.

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